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Criminal Issues to Consider When Filing or Opting Out of the OVDP

The IRS has been cracking down on both individual and corporate tax evasion it alleges is perpetrated by keeping assets in undisclosed accounts in off-shore "tax havens." Judging that this form of tax evasion would be most efficiently addressed through an amnesty program, the IRS has periodically been offering the Offshore Voluntary Disclosure Program, or OVDP, which allows those with previously undisclosed foreign accounts worth $10,000 or more to come into compliance with the law by filing a Report of Foreign Bank and Financial Accounts, or FBAR and amended tax returns.

The OVDP process involves affirmatively notifying the IRS Criminal Investigation department and then responding to an IRS pre-clearance letter by filing amended tax returns and FBARs, for the past eight years, as appropriate, and paying penalties as listed on a schedule. The penalties are substantial but lower than the civil penalty of 50% of the account every year.

While the OVDP is touted as an amnesty from criminal prosecution of tax evasion, the eligibility criteria for the program are numerous and rigorous, and there is no guarantee that the IRS won't prosecute upon analyzing the disclosures if it determines the disclosures were false or not complete. Therefore, delinquent taxpayers are urged to seek legal advice before applying.

Because of these risks and penalties, the OVDP has not been universally popular. Some taxpayers have engaged in "quiet disclosures" -- simply filing amended tax returns and FBARs without applying for the program. Others are biding their time, watching to see how OVDP participants and quiet disclosure filers are actually treated by the IRS. Some continue to seek an alternative avenue to compliance.

If you have undisclosed offshore assets, should you apply for the OVDP and quietly file amended returns, or wait and see what happens? Consider these factors:

  • Are you a realistic candidate for criminal prosecution if you don't comply? Could the IRS prove in court that you "willfully" violated the FBAR requirements?
  • Would amending your prior tax returns reduce your chance of being prosecuted or result in a civil audit and subsequent criminal case?
  • How do the potential penalties compare between quiet disclosure, OVDP participation, civil enforcement and criminal prosecution?

Answering these questions requires a specific analysis of your individual situation, so knowledgeable legal advice may be essential.

Source: Forbes' IRS Watch blog, "IRS FBAR Voluntary Disclosure Program and Opt Out Considerations," Charles Rettig, July 4, 2013